Retired, age 60 - Tax Plan. Please suggest improvements.

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MarkVH0518
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Joined: Tue Dec 13, 2016 2:14 pm

Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Tue Jul 10, 2018 4:10 pm

Now that I have reached 59 1/2 I'm seeing a number of tax planning possibilities that I'd not noticed before -
because they were not available to me. I'd appreciate your suggestions for improving our tax management plan.

I am now 60, my wife is 58.5. I have a pension of 35K; my wife has no pension.
We have been retired for 3 years now and can live very comfortably, even somewhat extravagantly, on 130K per year.
On that basis, our marginal tax bracket is 22%. We file separately because Ohio does not have different tax tables
for married and married-filing separately. By filing separately we save almost $2K per year in Ohio taxes.

The plan is to take my wife's social security at 62 and mine at age 70. Her SS will be $22K; mine will be $40K.

Before the 2017 tax changes we were performing Roth conversions to the maximum of the 25% bracket,
and were projected to just stay just within the same bracket when RMDs start. I intend to take advantage of the new 24% bracket
for Roth conversions, at least a couple of years.

I also think that eliminating our taxable accounts should reduce tax payments in the future by avoiding Net Investment Income Tax (NIIT).

Here is my tax plan at the moment. Please suggest improvements.

2018: ages 60, 59
Roth conversions for both of us up to nearly the top of the 24% bracket.
I don't want to get too close and spill into the 32% bracket. We'll pay a little of NIIT.

2019: ages 61, 60
The taxable accounts are in my wife SSN. Sell all capital gains.
Keep her in the 12% bracket for 0% cap gains tax. Use her Roth conversions up to that 12% bracket limit.
Use the full 24% bracket for my Roth conversions. Live off the taxable account, nearly eliminating it. Might not be any NIIT.

2020: ages 62, 61
Return again to performing Roth conversions for both of us up to limit of 24% tax bracket.
Spend whatever remains of taxable accounts and emergency fund accounts. Use the Roth accounts for emergency cash.

2021: ages 63, 62
File for wife's social security; perform Roth conversions up to IRMAA tier 1 of $214K modified AGI.

Repeat the 2021 plan until my reaching age 70,
except that one year will probably take the itemized deduction and fund our charity trust again.

2028: ages 70, 69
File for my social security; start RMDs; consider qualified charitable deductions if our tIRA accounts are still big.
Continue with Roth conversions depending our best guess of the future tax brackets for us and our heirs.

As background, I came to this plan using (1) a personalized spreadsheet written by my son, the CPA,
concentrating on using Roth conversions to avoid RMDs that propel us into a higher tax bracket,
(2) belief that the current tax brackets are unsustainable in the long term, (3) a recognition that I no longer need
taxable accounts for emergency funds, and 4) a desire to minimize NIIT and medicare premiums.

What do you suggest for improvements?

Thanks,
Mark

cas
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by cas » Tue Jul 10, 2018 4:39 pm

Were you planning on switching to filing taxes married-filing-jointly at IRMAA age?

I'm guessing so, since you mention the $214,000 threshold (which applies to married-filing-jointly), but thought it was probably best to ask. Looks like, for IRMAA purposes, married-filing-separately jumps directly from the lowest to the highest IRMAA bracket at a MAGI threshold of $85,000.

Source: https://www.medicare.gov/your-medicare- ... costs.html

jebmke
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by jebmke » Tue Jul 10, 2018 4:40 pm

I would not fund a DAF for use past 70.5 if you have an IRA unless the tax rate is significantly higher in the year you fund the DAF compared to your IRA years. DAFs carry expenses that are not needed in an IRA and you can use the QCD to fund charity at that point without incurring the DAF expenses. The key is that you have to have a good handle on what your tax return looks like in the out years (70.5 and beyond).
When you discover that you are riding a dead horse, the best strategy is to dismount.

PartIrish
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by PartIrish » Tue Jul 10, 2018 5:39 pm

MarkVHO518,

Won't your plan for taking Social Security spousal benefits at 62 and then your own at 70 fall under the 2016 "deemed filing" rule?

https://www.ssa.gov/planners/retire/claiming.html

I am 61 and though my spouse is 66, under the new rules I cannot file for spousal benefits early and allow my own benefit to grow--I would be deemed to have filed early for my own benefit.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Tue Jul 10, 2018 7:56 pm

PartIrish wrote:
Tue Jul 10, 2018 5:39 pm
MarkVHO518,

Won't your plan for taking Social Security spousal benefits at 62 and then your own at 70 fall under the 2016 "deemed filing" rule?
I won't be claiming spousal benefits. We will be claiming my wife's benefits at her age 62. I will not be taking any benefits until my age 70.
My wife will then claim my survival benefits if I pass before she does. Under my plan neither of us take spousal benefits.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Tue Jul 10, 2018 8:06 pm

cas wrote:
Tue Jul 10, 2018 4:39 pm
Were you planning on switching to filing taxes married-filing-jointly at IRMAA age?

I'm guessing so, since you mention the $214,000 threshold (which applies to married-filing-jointly), but thought it was probably best to ask. Looks like, for IRMAA purposes, married-filing-separately jumps directly from the lowest to the highest IRMAA bracket at a MAGI threshold of $85,000.

Source: https://www.medicare.gov/your-medicare- ... costs.html
Thank you cas! I have just become aware of IRMAA. The table I was using did not include marred filing jointly. That threshold of $85K is
very low and the medicare premium very high. The $2K I save in Ohio taxes will be swamped by the $300 * 12 * 2 = $7200 in joint medicare premiums.

This is lesson 1 for me. And given that IRMAA is set in tax returns 2 years in advance of the medicare payments, it would have been a
very, very expensive mistake.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Tue Jul 10, 2018 8:14 pm

jebmke wrote:
Tue Jul 10, 2018 4:40 pm
I would not fund a DAF for use past 70.5 if you have an IRA unless the tax rate is significantly higher in the year you fund the DAF compared to your IRA years. DAFs carry expenses that are not needed in an IRA and you can use the QCD to fund charity at that point without incurring the DAF expenses. The key is that you have to have a good handle on what your tax return looks like in the out years (70.5 and beyond).
Yes, I was thinking this way too, although it's not clear from my initial post. My charity trust is now funded for 5 years. So at age 65
(or so) we'll itemize for one single tax year and refund the charity trust to last until my age 70.5. After that we'll just use QCD.

bradpevans
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by bradpevans » Tue Jul 10, 2018 8:23 pm

If you are taking Medicare at 65 I believe your income at 63 comes into play

I’d be interested in your spreadsheet if you could PM me (wiping out your data first of course)

My situation is very similar although I’ve got about 5-10 years till I pull the ripcord
Last edited by bradpevans on Wed Jul 11, 2018 8:06 am, edited 1 time in total.

ralph124cf
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by ralph124cf » Wed Jul 11, 2018 5:43 am

Entered in error.
Last edited by ralph124cf on Wed Jul 11, 2018 6:48 am, edited 1 time in total.

cas
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by cas » Wed Jul 11, 2018 6:13 am

ralph124cf wrote:
Wed Jul 11, 2018 5:43 am
Just one comment about IRMAA: ROTH conversions count as income for IRMAA, and then they are counted again as income when withdrawn from ROTH, for IRMAA accounting.

Ralph
Ralph, could provide a link to your information source for this statement?

"Medicare Premiums:Rules For Higher-Income Beneficiaries", put out by socialsecurity.gov (https://www.ssa.gov/pubs/EN-05-10536.pdf p. 2) says
To determine if you’ll pay higher premiums, Social Security
uses the most recent federal tax return the IRS provides
to us. If you must pay higher premiums, we use a sliding
scale to make the adjustments, based on your modified
adjusted gross income (MAGI). Your MAGI is your total
adjusted gross income and tax-exempt interest income.
(bold added by me)

I agree that conversions from a traditional IRA to a Roth IRA are included in adjusted gross income (line 37 on a 2017 IRS 1040) and are therefore included in IRMAA MAGI.

However, (qualified) withdrawals from a Roth IRA are another matter. Qualified withdrawals from a Roth IRA are neither included in adjusted gross income (line 37 on a 2017 IRS 1040) nor categorized as tax-exempt interest. Given this, I don't see how your statement could be correct. But if you want to provide a link to a reliable source that backs up what you say, I'd certainly be willing to read it.

ralph124cf
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by ralph124cf » Wed Jul 11, 2018 6:48 am

cas wrote:
Wed Jul 11, 2018 6:13 am
ralph124cf wrote:
Wed Jul 11, 2018 5:43 am
Just one comment about IRMAA: ROTH conversions count as income for IRMAA, and then they are counted again as income when withdrawn from ROTH, for IRMAA accounting.

Ralph
Ralph, could provide a link to your information source for this statement?

"Medicare Premiums:Rules For Higher-Income Beneficiaries", put out by socialsecurity.gov (https://www.ssa.gov/pubs/EN-05-10536.pdf p. 2) says
To determine if you’ll pay higher premiums, Social Security
uses the most recent federal tax return the IRS provides
to us. If you must pay higher premiums, we use a sliding
scale to make the adjustments, based on your modified
adjusted gross income (MAGI). Your MAGI is your total
adjusted gross income and tax-exempt interest income.
(bold added by me)

I agree that conversions from a traditional IRA to a Roth IRA are included in adjusted gross income (line 37 on a 2017 IRS 1040) and are therefore included in IRMAA MAGI.

However, (qualified) withdrawals from a Roth IRA are another matter. Qualified withdrawals from a Roth IRA are neither included in adjusted gross income (line 37 on a 2017 IRS 1040) nor categorized as tax-exempt interest. Given this, I don't see how your statement could be correct. But if you want to provide a link to a reliable source that backs up what you say, I'd certainly be willing to read it.
Yes, you are correct. I was given wrong information by my tax man.

Ralph

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Wed Jul 11, 2018 11:15 am

cas wrote:
Tue Jul 10, 2018 4:39 pm
Were you planning on switching to filing taxes married-filing-jointly at IRMAA age?

I'm guessing so, since you mention the $214,000 threshold (which applies to married-filing-jointly), but thought it was probably best to ask. Looks like, for IRMAA purposes, married-filing-separately jumps directly from the lowest to the highest IRMAA bracket at a MAGI threshold of $85,000.

Source: https://www.medicare.gov/your-medicare- ... costs.html
Upon one night's reflection, do I get a pass in the first half year of medicare premiums?

I will turn 65 in May, 2023. In 2023, the half year of medicare, my 2022 tax return will be available when I sign up in May.
Will 2022 tax return be used to determine my first half year's premiums?
Does that mean I still file separately in 2021 without impacting IRMAA in 2023?

Thanks
Mark

jebmke
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by jebmke » Wed Jul 11, 2018 11:32 am

As far as I know, IRMAA starts immediately. My wife starts Medicare in September and she has already been notified of the IRMAA premium adder.
When you discover that you are riding a dead horse, the best strategy is to dismount.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Wed Jul 11, 2018 11:52 am

jebmke wrote:
Wed Jul 11, 2018 11:32 am
As far as I know, IRMAA starts immediately. My wife starts Medicare in September and she has already been notified of the IRMAA premium adder.
Yes, IRMAA start immediately. But what year's tax return was used to determine your IRMAA for 2018.
Was tax return from 2017 or tax return from 2016?

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Peter Foley
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by Peter Foley » Wed Jul 11, 2018 1:11 pm

I think you have done a good job. Here is a generic template that I created based on the "withdrawal strategy" plan I created. It has not been fully updated based on the new tax law.

2017: Assumption – Husband, age 65 retired with pension, wife age 60 part time work. Husband delay SS benefits.
Adjusted Gross Income = $20,000 pension + $16,650 part time work + $5,000 taxable account dividends in cash (not reinvested) = $41,650
2017 Tax rate brackets schedule 15% >75,900 = 25% < 153,100
SSA income taxable @ 50% $32,000 - $44,000 (AGI + tax exempt interest)
SSA income taxable @ 85% >$44,000 (AGI + tax exempt interest) NA per no SS.

Actions and adjustments

Convert TIRA to Roth + $40,000 [Net AGI = $81,650 minus exemptions & standard deductions @ 20k] = $61,650 taxable income

Sell 1,000 shares of XYZ corp @ $20/share. Cost basis = $10/share.
Additional taxable income = 0 because with the addition of $10,000 in capital gains you are still below $75,900 and remain in the 15% tax bracket where dividends and capital gains are not taxable. Note: Pay taxes on $56,650 because dividends are also tax free in 15% bracket.

Spend income from sale of taxable to supplement employment, pension, and dividends.

2018: Assumption – Husband’s pension, wife retired. Both will delay SS benefits
Adjusted Gross Income = $21,000 pension + $5,000 dividends = $26,000
2018 Tax rate brackets schedule 12% >77,400 = 22% < 165,000
SSA income taxable @ 50% $32,000 - $44,000 (AGI + tax exempt interest)
SSA income taxable @ 85% >$44,000 (AGI + tax exempt interest) NA per no SS.

Actions and adjustments

Convert TIRA to Roth + $40,000 [Net AGI = $66,000 minus standard deductions. @ 24k] = $42,000. Taxable income
Sell 2,000 shares of XYZ corp @ $20/share. Cost basis = $10/share.
Addition taxable income = 0 because with the addition of $20,000 in capital gains you are still below $77,200 and remain in the 15% LTCG tax bracket where dividends and capital gains are not taxable. Note: Pay taxes on $41,000 because dividends are also tax free in 15% LTCG bracket.

Spend income from sale of taxable to supplement employment, pension, and dividends.

MrBeaver
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MrBeaver » Wed Jul 11, 2018 1:25 pm

MarkVH0518 wrote:
Tue Jul 10, 2018 4:10 pm
I have a pension of 35K; my wife has no pension.
We have been retired for 3 years now and can live very comfortably, even somewhat extravagantly, on 130K per year.
...
The plan is to take my wife's social security at 62 and mine at age 70. Her SS will be $22K; mine will be $40K.
Your plan seems fine, though it seems to be optimizing for maximum income and tax-free assets while retired, irrespective of how much you actually plan to spend. Given your statement that a comfortable or extravagant standard of living can be had for 130k per year (after taxes), your high pension + SS, and I'm guessing a high tax-deferred balance, I wonder if it might make sense to optimize instead for 130k of after-tax income while putting other assets in vehicles that can be maximally efficient to achieve your non-personal expenditure goals? These would be chiefly bequests to provide inheritance, and charitable giving.

For instance, with SS + pension of 97k per year at age 70, you are requesting only 33k from investments for personal expenditure. A 4% withdrawal rate yielding that income would be an account balance of 825k. Doing conversions which would raise your total Roth space to greater than 825k at age 70 would essentially have you paying 22% tax on money you later give it to charity or leave to heirs, reducing the amount of money you can give. An alternate strategy would be to convert only enough to provide you with after-tax income (from pension + SS + Roth distributions) of your desired spending (130k), while leaving the rest in taxable accounts and traditional IRAs (for QCDs and/or bequests).

Or am I missing something?

walkindude
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by walkindude » Wed Jul 11, 2018 1:30 pm

Peter Foley wrote:
Wed Jul 11, 2018 1:11 pm
I think you have done a good job. Here is a generic template that I created based on the "withdrawal strategy" plan I created. It has not been fully updated based on the new tax law.

2018: Assumption – Husband’s pension, wife retired. Both will delay SS benefits
Adjusted Gross Income = $21,000 pension + $5,000 dividends = $26,000
2018 Tax rate brackets schedule 12% >77,400 = 22% < 165,000
SSA income taxable @ 50% $32,000 - $44,000 (AGI + tax exempt interest)
SSA income taxable @ 85% >$44,000 (AGI + tax exempt interest) NA per no SS.

Actions and adjustments

Convert TIRA to Roth + $40,000 [Net AGI = $66,000 minus standard deductions. @ 24k] = $42,000. Taxable income
Sell 2,000 shares of XYZ corp @ $20/share. Cost basis = $10/share.
Addition taxable income = 0 because with the addition of $20,000 in capital gains you are still below $77,200 and remain in the 15% LTCG tax bracket where dividends and capital gains are not taxable. Note: Pay taxes on $41,000 because dividends are also tax free in 15% LTCG bracket.

Spend income from sale of taxable to supplement employment, pension, and dividends.
+1. Excellent plan and similar to what I'm doing. I wish we could live on 60-70k per year.

Two questions:

- how do you pay the taxes on the conversions, just out of general pension/divs/cap gains above?
- how did you decide on the $40k conversion, or does that number get you to your RMD target at 70?

I struggle with the balancing of taking cap gains at 0% and conversions to Roth at 12% bracket. Thanks.

jebmke
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by jebmke » Wed Jul 11, 2018 1:31 pm

MarkVH0518 wrote:
Wed Jul 11, 2018 11:52 am
jebmke wrote:
Wed Jul 11, 2018 11:32 am
As far as I know, IRMAA starts immediately. My wife starts Medicare in September and she has already been notified of the IRMAA premium adder.
Yes, IRMAA start immediately. But what year's tax return was used to determine your IRMAA for 2018.
Was tax return from 2017 or tax return from 2016?
I don't know. I just pay the bill. It isn't a big number. I think my IRMAA premium is something like $65 a month.
When you discover that you are riding a dead horse, the best strategy is to dismount.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Wed Jul 11, 2018 2:19 pm

MrBeaver wrote:
Wed Jul 11, 2018 1:25 pm
MarkVH0518 wrote:
Tue Jul 10, 2018 4:10 pm
I have a pension of 35K; my wife has no pension.
We have been retired for 3 years now and can live very comfortably, even somewhat extravagantly, on 130K per year.
...
The plan is to take my wife's social security at 62 and mine at age 70. Her SS will be $22K; mine will be $40K.
Your plan seems fine, though it seems to be optimizing for maximum income and tax-free assets while retired, irrespective of how much you actually plan to spend. Given your statement that a comfortable or extravagant standard of living can be had for 130k per year (after taxes), your high pension + SS, and I'm guessing a high tax-deferred balance, I wonder if it might make sense to optimize instead for 130k of after-tax income while putting other assets in vehicles that can be maximally efficient to achieve your non-personal expenditure goals? These would be chiefly bequests to provide inheritance, and charitable giving.

For instance, with SS + pension of 97k per year at age 70, you are requesting only 33k from investments for personal expenditure. A 4% withdrawal rate yielding that income would be an account balance of 825k. Doing conversions which would raise your total Roth space to greater than 825k at age 70 would essentially have you paying 22% tax on money you later give it to charity or leave to heirs, reducing the amount of money you can give. An alternate strategy would be to convert only enough to provide you with after-tax income (from pension + SS + Roth distributions) of your desired spending (130k), while leaving the rest in taxable accounts and traditional IRAs (for QCDs and/or bequests).

Or am I missing something?
You are not missing anything at all. Although I haven't 'formally' declared maximizing for non-personal expenditure
(let's call it legacy) goals, that is where I'm headed.

I've only been retired for 3 years, I'm not yet ready declare success until the first market crash in retirement.
I also don't want to declare success and start making concrete plans for legacy goals without my wife being on-board
and she doesn't understand the issues of market variability and such as well as I'd prefer.

Nevertheless, I have decided that my heirs will not be in a lower tax bracket than me (and could well be higher).
And since my tax-free assets are not yet to the amount I want to leave them, performing Roth conversions on their
behalf is what I intend to do.

I need to study your scenario further.
But you have provided me lesson 2: Don't convert tIRA fund to Roth that eventually will be given to charity.
I need to think that through.
Thanks

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Peter Foley
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by Peter Foley » Wed Jul 11, 2018 2:22 pm

walkingdue:

The Roth conversion amounts are somewhat arbitrary. They are intended to keep a couple well within the old 15% (new 12%) tax bracket. They are partially driven by a plan to delay SS benefits and convert sufficient assets so as not to jump into a much higher tax bracket and a higher level of Medicare B once RMD's start. RMD's were certainly a consideration. + or - $20k in Roth conversion/year does not have much of an impact other than raising one's immediate tax bill.

I have used both the i-orp and RPM calculators to run simulations. Roth conversions are best done when the taxes due can be paid from a taxable account. We have paid for our conversions out of taxable accounts (dividends, pension, a couple inherited EE bonds that reached final maturity and some long term capital gains). As mentioned, too much Roth conversion would drain taxable accounts which would in turn create additional federal taxation of capital gains.

Everyone's situation is a bit different. Minnesota has an 8% + marginal income tax rate at this level of income. MN also had a fairly low estate tax until recently - another motivation for some couples to convert some TIRA to Roth. A surviving spouse could be hit by a high tax rate and be later subject to an estate tax (no estate tax portability in Minnesota).

Edit as Mark was posting when I was writing. Some portion of RMDs to charity is part of our plan. Good point.
Last edited by Peter Foley on Wed Jul 11, 2018 2:25 pm, edited 1 time in total.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Wed Jul 11, 2018 2:25 pm

walkindude wrote:
Wed Jul 11, 2018 1:30 pm

I struggle with the balancing of taking cap gains at 0% and conversions to Roth at 12% bracket. Thanks.
Dude,

Maybe your question wasn't to me, but it applies to my sister, who I'm helping with financial planning.
Here's how I'm thinking about this question and am looking for confirmation to my approach.

Cap Gains go from 0% tax rate to 15% tax rate, so the savings is a 15% tax rate
Roth conversions go from 12% tax rate to 22% tax rate, so the savings is 10% tax rate.

Under that simple-minded analysis 15% tax savings is better than 10% tax savings,
so optimize for Capital Gains.

Am I mistaken?
mark

MrBeaver
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MrBeaver » Wed Jul 11, 2018 8:18 pm

MarkVH0518 wrote:
Wed Jul 11, 2018 2:25 pm
walkindude wrote:
Wed Jul 11, 2018 1:30 pm

I struggle with the balancing of taking cap gains at 0% and conversions to Roth at 12% bracket. Thanks.
Dude,

Maybe your question wasn't to me, but it applies to my sister, who I'm helping with financial planning.
Here's how I'm thinking about this question and am looking for confirmation to my approach.

Cap Gains go from 0% tax rate to 15% tax rate, so the savings is a 15% tax rate
Roth conversions go from 12% tax rate to 22% tax rate, so the savings is 10% tax rate.

Under that simple-minded analysis 15% tax savings is better than 10% tax savings,
so optimize for Capital Gains.

Am I mistaken?
mark
I'm by no means an expert in this, but I do know that there is some future value to having money in a Roth account vs taxable investments assuming other income sources are significant enough to cause taxable capGains and dividends in the future to be above the 0% capGains rate. Essentially, money in a Roth grows faster than money in taxable (assuming the person's marginal capGains rate is not 0%). Because of that, money in a Roth will compound faster than money in taxable, such that converting to save 15% on the conversions is better than saving 10% marginal tax rate on traditional distributions in the short term, but in some cases conversions are better in the long term because of the compounding advantage. But I'm sure others can explain this better than myself.

Roth growth and distributions may have other benefits as far as IRMAA tiers is concerned as well, since it is not counted toward AGI while taxable dividends or capital gains are counted toward AGI.

walkindude
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by walkindude » Thu Jul 12, 2018 6:25 am

MarkVH0518 wrote:
Wed Jul 11, 2018 2:25 pm
walkindude wrote:
Wed Jul 11, 2018 1:30 pm

I struggle with the balancing of taking cap gains at 0% and conversions to Roth at 12% bracket. Thanks.
Dude,

Cap Gains go from 0% tax rate to 15% tax rate, so the savings is a 15% tax rate
Roth conversions go from 12% tax rate to 22% tax rate, so the savings is 10% tax rate.

Under that simple-minded analysis 15% tax savings is better than 10% tax savings,
so optimize for Capital Gains.

Am I mistaken?
mark
Mark,

That's a reasonable way to look at it. However, if you consider the step-up in basis of taxable for heirs, it may skew the decision slightly as well.

A very complicated decision - someday I'll probably try to throw together a spreadsheet to try to optimize it. Or try one (or several) of the resources already out there.

Thanks to you and Peter Foley for the discussion!

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Peter Foley
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by Peter Foley » Thu Jul 12, 2018 9:27 am

MrBeaver

You are correct in that some conversions are better in the long term. Sometimes, however, it takes many years. The retirement calculator that uses excel, Retiree Portfolio Model, has a output table that shows the break even point for Roth conversions in given scenarios. For me it is one of the more useful features of that calculator. I have to ask myself, would I really do a conversion if the payback is 15 to 20 years out?

GAAP
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by GAAP » Thu Jul 12, 2018 9:36 am

Just to tweak your assumption about tax brackets: the current brackets actually expire in 2025, so you might want to run the numbers with the old levels as a possibility.

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Hayden
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by Hayden » Thu Jul 12, 2018 10:02 am

Two comments based on what I've been wrestling with for myself:

I'm surprised you decided to do Roth conversions over the $200,000 point where the 3.8% NIIT kicks in. Personally, I'm planning on doing Roth conversions just up to AGI of $200,000.

Like you, I probably have more money than I need to live comfortably. I'm unsure on the value of Roth conversions, when the money will probably end up going to charity.

MarkVH0518
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MarkVH0518 » Thu Jul 12, 2018 8:22 pm

Hayden wrote:
Thu Jul 12, 2018 10:02 am
Two comments based on what I've been wrestling with for myself:

I'm surprised you decided to do Roth conversions over the $200,000 point where the 3.8% NIIT kicks in. Personally, I'm planning on doing Roth conversions just up to AGI of $200,000.

Like you, I probably have more money than I need to live comfortably. I'm unsure on the value of Roth conversions, when the money will probably end up going to charity.
I have a personal answer to this NIIT issue:
1) In year 2 I plan to spend down all my taxable accounts. They are in my wife's SSN and she doesn't have the pension.
Once taxable account are gone and emergency funds are moved to Roth accounts, NIIT has no impact.
2) I'm not spending down taxable accounts in 2018 because I want to eliminate the need to file form 8606 in my SSN.
My IRA includes some tax basis (i.e. after tax contributions); most of my pre-tax money is still in my company's 401k.
In 2018 I plan to use (either convert to Roth or pull out for living expenses) 100% of my IRA. Then my IRA tax basis (and my IRA)
will be $0. Then first thing in 2019, I will finally rollover my 401k to an IRA, but then I have no tax basis.
Thus eliminating the need to file 8606.
I have long been wanting to eliminate that annoying 8606! My wife still files 8606, but we'll be filing that until the accounts close, yuk!

neoptolemus412
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by neoptolemus412 » Thu Jul 12, 2018 8:50 pm

The basic plan sounds fine as long as there's no major cash flow changes (house purchase, health, etc.) I would caution that a Roth is great if your time horizon is long, but honestly, it seems like you're doing all of this for estate planning/heirs rather than maximizing after-tax cash flows.

Probably uncertain what year 10 looks like as the tax laws will sunset in 2026, unless Congress acts. I'm telling everyone that rates in the next 2-4 years will be at their lowest for most, so if converting is something you are gung ho about, now is the time to do conversions.

MrBeaver
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by MrBeaver » Thu Jul 12, 2018 9:40 pm

MarkVH0518 wrote:
Thu Jul 12, 2018 8:22 pm
2) I'm not spending down taxable accounts in 2018 because I want to eliminate the need to file form 8606 in my SSN.
My IRA includes some tax basis (i.e. after tax contributions); most of my pre-tax money is still in my company's 401k.
In 2018 I plan to use (either convert to Roth or pull out for living expenses) 100% of my IRA. Then my IRA tax basis (and my IRA)
will be $0. Then first thing in 2019, I will finally rollover my 401k to an IRA, but then I have no tax basis.
Thus eliminating the need to file 8606.
I have long been wanting to eliminate that annoying 8606! My wife still files 8606, but we'll be filing that until the accounts close, yuk!
Not sure what your situation is, but if your 401k allows after-tax rollovers, it may be simpler to roll your existing IRA into the 401k, then do a direct rollover from the after-tax 401k dollars to a Roth, and rollover the pre-tax dollars to a traditional IRA. Obviously not all 401k plans allow this, so you’d have to check your plan documents.

jeffarvon
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Location: Columbus, Ohio

Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by jeffarvon » Fri Jul 13, 2018 12:34 pm

Peter Foley wrote:
Thu Jul 12, 2018 9:27 am
MrBeaver

You are correct in that some conversions are better in the long term. Sometimes, however, it takes many years. The retirement calculator that uses excel, Retiree Portfolio Model, has a output table that shows the break even point for Roth conversions in given scenarios. For me it is one of the more useful features of that calculator. I have to ask myself, would I really do a conversion if the payback is 15 to 20 years out?
Peter, can you comment further on the RPM comparisons? In particular, is the base scenario (without Roth conversions) versus a Roth conversion scenario shown in pre-tax dollars? If so, how might I think of the comparison with an after-tax view?
"Enough is as good as a feast" - Mary Poppins

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Hayden
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Re: Retired, age 60 - Tax Plan. Please suggest improvements.

Post by Hayden » Fri Jul 13, 2018 4:53 pm

Peter Foley wrote:
Thu Jul 12, 2018 9:27 am
MrBeaver

You are correct in that some conversions are better in the long term. Sometimes, however, it takes many years. The retirement calculator that uses excel, Retiree Portfolio Model, has a output table that shows the break even point for Roth conversions in given scenarios. For me it is one of the more useful features of that calculator. I have to ask myself, would I really do a conversion if the payback is 15 to 20 years out?
This is the issue for me. RPM told me the break even is age 87 in my case. In realty, I think there are just too many unpredictable variables to make precise predictions. For example, what if I end up needing expensive medical care for years? I wish RPM had a Monte Carlo component.

I'm going ahead with the Roth conversions because I plan to live a long time. Only time will tell if it is the right decision.

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